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Why The Party Is Over For AMD

Cryptocurrency miners boosted AMD's GPU business last year. But the party is now over.

Back in December 2013, high-end graphics cards from Advanced Micro Devices(NASDAQ:AMD) were selling out, and where they were available, prices were extremely elevated. There was intense demand, but the source was those using the GPUs to mine cryptocurrencies, namely Litecoin, not gamers.

I said at the time that AMD's graphics cards were selling out for the wrong reason, and I predicted that this market for AMD would dry up sooner rather than later. Eventually, specialized mining hardware would render GPUs obsolete for the task, which is exactly what had happened with the most prominent of cryptocurrencies, Bitcoin.

AMD's PC business has deteriorated significantly since then, and part of the reason is that this cryptocurrency market has essentially disappeared. Given that hardware for mining Litecoin is on the market, and Litecoin prices have collapsed over the past year, the cryptocurrency party for AMD appears to be over.

What happened?AMD discloses very little about its GPU business, and the company's reorganization in the middle of 2014 muddles the picture even more. But during the fourth quarter of 2013 and the first quarter of 2014, AMD's GPU business was doing well, by all indications. The average selling price of AMD's GPUs rose year over year during both the fourth quarter of 2013 and the first quarter of 2014, and during the first-quarter conference call, then-CEO Rory Read pointed to GPU revenue growth, saying that he expected to gain market share going forward.

During the same conference call, an analyst asked then-Senior Vice President and current CEO Lisa Su about how the cryptocurrency craze was affecting the GPU business. She gave a non-answer, saying only that demand was strong.

Things started to fall apart as early as the following quarter. During the second quarter, GPU average selling prices declined both year over year and sequentially, leading to lower add-in board channel sales. This is consistent with a decline in demand from cryptocurrency miners, since GPUs were being bought for the purpose individually, not as part of pre-built systems. AMD pointed out in its conference call that a significant number of used GPUs had come into the market, and that inventory was building up as a result.

It was around this time when pre-orders for the first specialized hardware for mining Litecoins started to show up. This hardware took months to become available, but it's now on the market. These application-specific integrated circuits, or ASICs, are far more efficient at their specific task compared with GPUs.

Another development was the collapse of the Litecoin market. One year ago, Litecoins were trading at around $20 each. After a year of continual decline, Litecoins trade for less than $2 each. This collapse erased the profitability of mining Litecoins with GPUs.

Big problemsCryptocurrency mining isn't quite a mainstream topic, but judging from the subreddit on Litecoin mining, it's currently not profitable to mine Litecoins with GPUs, and even with ASICs, profitability is far from guaranteed. There are two problems facing AMD. First, used GPUs could continue to flood the market for quite some time. Second, and more importantly, all of these previous buyers of AMD's GPUs won't be upgrading. Those were one-time sales.

Multiple Reddit users who posted comments in the Litecoin mining subreddit are mining with AMD's GPUs only to heat their homes, even though the mining itself isn't profitable. I found that funny, but AMD shouldn't. These were people buying multiple, even dozens, of AMD's high-end graphics cards at a time. All of those sales are now gone.

In AMD's most recent quarter, the PC business as a whole performed terribly. GPU sales fell, and the Computing and Graphics segment posted a $56 million operating loss. Su explicitly pointed out during the conference call that demand was elevated during the early part of 2014 because of cryptocurrency miners.

The first quarter of this year is almost certainly going to be terrible for AMD's GPU business. Strong sales during the first quarter of 2014 thanks to cryptocurrency demand won't be repeated, and there's nothing to take its place. AMD isn't expected to launch any new graphics cards until the second quarter. The company has already guided for a big year-over-year revenue decline for the first quarter, and part of that is undoubtedly thanks to elevated GPU demand last year.

As much as this is all just a long-winded way to say "I told you so," I'm also trying to impart an important lesson. When a company experiences abnormally strong demand, there's often a very specific driver behind it. There was no fundamental reason AMD's GPUs should have been selling as well as they were. They were perfectly capable graphics cards, but NVIDIA's products were very competitive for gaming purposes.

It was widely known at the time that demand from cryptocurrency miners was driving this demand, and it didn't take much effort to realize that all of this demand was temporary. AMD failed to realize it, apparently, and so did many investors. Sometimes, what seems like a good thing is exactly the opposite in the long run.